Yet again the euro managed to avoid the headlines and thereby the attention accorded to its higher-profile peers. The dollar was under steady downward pressure because of ongoing unease among investors about the state of government finances. There was upward pressure on the yen as a by-product of dollar weakness and because the market felt there was potential mileage in pushing for long term highs against the dollar. The pound alternated between looking good, for example when house price indices showed a continuing recovery, and bad when anyone form the Bank of England opened their mouth.

To be fair to the Bank, its pronouncements in November were nowhere near as damaging as they had been in the preceding couple of months. The minutes of the Monetary Policy Committee were less than helpful, showing a greater than usual lack of unanimity at the November meeting. One member thought there was no need for any extension of the quantitative easing (“printing money”) that has been going on since the beginning of the year. Seven members thought another £25 billion would do the trick and one wanted to bung in an extra £40 billion. It was all fair debate on a subject that even the best-informed experts find perplexing but it made investors nervous about the pound.

The Governor continued his efforts to manage economic expectations – and the pound – downwards but one of his boys decided to put a brighter shine on the situation. MPC member Andrew Sentance conceded in a speech that ‘the UK economy is now moving out of recession and into the recovery phase of the cycle.’ He also looked ahead to when interest rates would have to move upwards again because ‘as the recovery develops there will also come a point where we need to tighten monetary policy.’ Having become accustomed to a diet of doom and gloom from the Bank, investors saw Dr Sentance’s position as a ray of hope for the UK economy.

Towards the end of the month the pound found itself under fire again when the Emirates state-owned firm Dubai World announced that it would not be making any loan repayments for six months. There were a couple of reasons for sterling to take the flak. Britain’s banks are heavily involved in the region and are therefore probably (though nobody was admitting anything at the time) exposed to Dubai World. At a different level, it was a reminder that Britain’s sovereign debt is at risk of losing its top-level AAA credit rating. Like Dubai, but on an entirely different scale, the UK government has borrowed, and will have to borrow in the future, very large amounts of money. There is absolutely no danger that Britain could default on its borrowings; in the very worst case it could repay with newly-minted money. But investors are not brimming with confidence about the possibilities.

A recovery for sterling remains as elusive as ever. The pound seems ever-ready to snatch defeat from the jaws of victory and the government is doing nothing to answer investors’ fears about the budget gap or the economy. The accident-prone pound still looks more at home running with turkeys than soaring with eagles.

December Currency update, 5.0 out of 5 based on 1 rating

Tags: December Currency update

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